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(1883-1950)
Joseph Allois Schumpeter
 
: Journal of Economic Issues, Jun. 94, Vol. 28, Issue 2, p. 489, 12p
Hara, Phillip Anthony
AN INSTITUTIONALIST REVIEW OF LONG WAVE THEORIES: SCHUMPETERIAN INNOVATION, MODES OF REGULATION, AND SOCIAL STRUCTURES OF ACCUMULATION
Since the late 1960s and early 1970s, most highly developed capitalist economies have suffered from a high level of instability and a sustained reduction in the rate of growth of real GDP. This has manifested itself in the three major recessions of 1974-75, the early 1980s, and the early 1990s in addition to the stock market and commercial property market crashes. A number of political economists of various ideological persuasions are sympathetic to the view that this relative downgrade should be examined within the context of successive long waves of economic growth, each lasting between 40 and 60 years. These authors take seriously the idea that capitalist economies have evolved through a series of qualitatively different historical epochs--1780s--1840s, 1850s-1890s, 1890s-1940s, and 1940-1990s--each of which can be divided roughly between phases of expansion (20-30 years) and contraction (20-30 years).
Given the emphasis most long wave analysts place on interdisciplinary method, evolution, technology, and institutions, it is perhaps surprising that no major article has appeared on long waves in the Journal of Economic Issues. Part of the reason for many AFEE members eschewing long waves relates to the tendency of some wave approaches to be deterministic, in the sense that events are said to occur through laws such that if these laws were known, then it would be possible to comprehend the past and predict the future [Brodbeck 1968]. Some wave theories are also economistic (not holistic) and mechanistic (rather than processual). However, not all wave theories are of this nature. In this paper, I scrutinize two theories that many institutionalists would have sympathy with: the Schumpeterian theory of innovation (linked to the "regulation approach") and David Gordon's theory of social structures of accumulation (SSA). These approaches are critically examined to determine broad continuity with the institutionalist method of (1) holistic and interdisciplinary analysis, (2) utilizing the notions of circular and cumulative causation, (3) incorporating evolutionary change, and (4) emphasizing the contradictions within and among institutions.[1]
Schumpeterian Innovation and the Regulation Approach
Joseph Schumpeter's theory of innovation and business cycles was developed in The Theory of Economic Development [Schumpeter 1911] and his two-volume work Business Cycles [Schumpeter 1939]. He devised less a theory of long waves than a useful historical method for understanding cycles in general. Schumpeter's method was not essentially interdisciplinary, since he sought in these works to delimit the scope of analysis to "economic life," one in which "private property, division of labor, and free competition prevail" [1911, 5]. This is true despite the fact that he realized that the "social process is really one indivisible whole" [1911, 3].
His model developed the notion of multiple cycles, and the three-cycle schema of Kitchin (3-5 years), Juglar (7-11 years), and Kondratieff cycles (40-60 years) was introduced because he found it to be "useful" in "marshalling the facts" [Schumpeter 1939, 16970]. Schumpeter differentiated between "factors of change," which are endogenous to capitalism, and those which are exogenous [1939, 73]. The exogenous factors include war, revolution, social unrest, government policy, earthquakes, and crop production. For an understanding of the endogenous factors, it is necessary to comprehend his notion of "economic development." As he said: "By 'development,' therefore, we shall understand only such changes in economic life as are not forced upon it from without but arise by its own initiative, from within" [Schumpeter 1911, 63]. Development is the process of discontinuous change and disequilibrium brought about by innovation: "the carrying out of new combinations" [1911, 66].[2]
Such innovations (rather than inventions) include the introduction of a new good, the introduction of a new method of production, the opening of a new market, the conquest of a new source of supply of raw materials or half-manufactured goods, and the carrying out of the new organization of any industry (such as the creation or breakup of monopoly) [1911, 66]. Entrepreneurs tend to promote such changes in swarms, clusters, or bunches during long wave recovery, moving the economy above equilibrium. This provides the basis for technological rents and hence long wave prosperity. But after long lags, the technological rents decline as the previous innovations become established practices in economic life, and long wave downswing emerges.
The Keynesian revolution of the postwar boom crowded out Schumpeter's innovation hypothesis; but it re-entered academic discourse with the onset of the Kendratieff downswing of the late-1960s and the 1970s. Ernest Mandel [1964] was one of the first to recognize the forces of structural downswing that were underway in the 1960s. Notable modern Schumpeterian works include Gerhard Mensch [1979], Chris Freeman et al. [1982], J. J. van Duijn [1983], Alfred Kleinknecht [1987], and Andrew Tylecote [1992]. A major controversy surrounds the question of whether basic innovations bunch during depression, providing the basis for long wave upswing. Mensch argues that they do, but most disagree with him. Van Duijn [1983, chap. 10], for instance, presents evidence that innovation spreads during all phases of the long wave (recession, depression, recovery, and prosperity) but especially during recovery, prosperity and depression (in order of importance). The depression trigger hypothesis (and to some extent the swarming hypothesis) is thus said to be weak.
Tylecote, especially, seeks to develop a theory that is interdisciplinary, evolutionary, and places emphasis on circular interdependencies, contradictions and cumulative changes in the social and political economy. His approach, which is Schumpeterian with an important influence from the French "regulation school of political economy" (especially the work of Perez [1985]), is thus likely to be of great interest to institutionalists.[3]
To understand this work, it is useful to distinguish between a regime of accumulation (ROA) and a mode of regulation (MOR). A ROA is the technical and organizational system of production. For instance, in the United States, Tylecote argues that the Fordist ROA was well established by 1915. Assembly line methods, the Taylor system of work organization, the structure of corporate control, and aspects of the mass market were well in place by that time. What was missing was an appropriate MOR: the social and political institutions that would enhance the balance of power between workers and capital, the sphere of consumption, and the correspondence between the technological potential and the realization of that potential [Tylecote 1992, 239]. This mismatch produced a crisis, which eventually manifested in underconsumption and the Great Depression of the 1930s. The long wave up-swing became realized when there emerged a degree of rapport between the ROA and the MOR during the 1940s and 1950s. This was made possible by the promotion of (1) international integration via the Pax Americana, (2) political integration through the working class gaining more power at the government level, (3) economic integration via a power balance between industry and finance as well as between labor and capital, and (4) a measure of social integration through stability within the family. Eventually, however, the long wave downswing emerged in the 1970s when contradictions emerged, the potential of Fordism was exhausted, and a new ROA evolved: that of biotechnology and microelectronics. So far, the social and political institutions (MOR) have not adequately adapted in a symbiotic fashion with the technological/organizational system (ROA). The exact nature of long wave processes thus depends on the interaction of technological styles, social/political institutions, and feedbacks from the population, monetary, and inequality relationships.
Tylecote's view of long waves is an advance on the traditional Schumpeterian emphasis on innovation in that it introduces an evolutionary dialectic between technology, other institutions, and feedback processes. It is this fusion that should be of special interest to institutionalists, who have traditionally been concerned with the relationship between technology and social/political institutions. Tylecote seems to incorporate the methodology of interdisciplinary analysis, circular and cumulative causation, evolution, and contradictions. It is similar in many ways to David Gordon's theory of Kondratieff waves, based on an institutional analysis, which is examined below.
Social Structures of Accumulation
David Gordon considers the role of the broad social environment on the growth process and recognizes the interaction of economic, political, and social factors within the major institutions of capitalism. He recognizes that even the smooth internal workings of modern capitalism necessitate the reproduction of institutions for long-term capital accumulation. As he says, "Certain critical and concrete institutions must exist to make possible this movement of capital on its tracks," such as reliable labor markets, systems of labor management, and credit and transportation structures [Gordon 1978, 27].
The major SSA hypothesis is that business expectations and profitability, over long historical time, depend fundamentally on the degree of structured stability of the institutional environment. The pace of capital accumulation over the long wave is a function of institutional factors, which business people individually are usually powerless to influence. Without the required degree of stability, accumulation would falter [Gordon 1978, 12]. A second hypothesis is that capitalism evolves through successive waves of development and demise, and that each wave is characterized by a fundamentally reconstituted set of institutions, collectively known as the social structures of accumulation (SSA). Each wave is typically characterized by five phases of metamorphosis: (1) reestablishment of the SSA, (2) expanded reproduction, (3) decelerated accumulation, (4) institutional instability, and (5) institutional crises. Each of these phases is defined with reference to the stability of the individual institutions and to the unity of the SSA as a whole.
Of the five phases of each wave, the first four are collectively linked with long wave upswing, while institutional crisis is equated with long wave downswing. The crisis phase is characterized by major socioeconomic problems such as deep recessions/depression, high unemployment, and poverty. There is said to be a lag between the reestablishment of the SSA and the up-swing of growth as well as between the onset of institutional crisis and the downswing of economic growth and accumulation. There is thus a degree of interdependency between changes in the SSA and the short cycles, with the direction of causation mainly running from the SSA to growth, but with some degree of reverse causation (particularly during institutional crises).
Gordon argues that the institutions that have historically been necessary for stable accumulation include an internal corporate structure, a moderated structure of competition, the institutionalization of class struggle, an orderly monetary system, and government; a continuous supply of quality natural resources, intermediate goods, and labor power; plus an effective system of labor management, and effective demand [Gordon 1980, 12-17]. In Polanyi's [1944] institutional analysis, these may be seen as providing protective structures against so-called "free market processes."
Later works by Gordon and his colleagues have delimited the number of institutions in order to simplify the analysis. For instance, the post-1945 long upswing of U.S. capitalism is said to have been based on three main institutional structures that emerged shortly after the second world war as part of the "Postwar Corporate System." This provided the reproductive foundation for two decades of relatively strong accumulation of capital during the 1950s and 1960s and minor recessions. Due to internal contradictions within the institutions, as the postwar boom developed, the forces of contradiction or nonreproduction increased, and eventually the business cycle recessions became deeper during 1974-75, 1981-83, and 1990-93 as long wave upswing evolved toward downswing.
The three dominant institutional structures or spheres of postwar U.S. capitalism are said to include (1) Pax Americana, (2) the capital-labor accord, and (3) the state-citizen accord. Pax Americana was based on the hegemonic role of the United States in world affairs through the Bretton Woods System of fixed exchange rates, the role of Wall Street as the financial center of the world, the Marshall Plan (recovery for Europe), the Vietnam War to combat communism, and the central place of U.S. transnational corporations in technology transfer and production dominance. However, this structure was undermined during the late 1960s and early 1970s by growing challenges (to U.S. dominance) in both the First and the Third Worlds, through defeat in Southeast Asia, and from the growing power of Europe and the new industrializing nations. There were contradictory relations within the institutions of the world economy in the sense that the system depended upon U.S. hegemony for "leadership" and "supervision," but the very process of expanding Western capitalism and reforming Japanese and Gorman fascism led to challenges to U.S. capitalism and hence to the system.
The capital-labor accord of the 1950s and 1960s was based on the purging of militant unionists from positions of authority and on the institutionalization of numerous agreements in which union members allowed control of production to be left in the hands of management in return for distributive benefits, better work conditions, and more job security. A more docile work force and a relatively high rate of technological change enabled productivity gains to be distributed between capital and labor. An expansion of labor supervision, internal labor markets, and labor-relations personnel provided the environment for a stable system of production, distribution, and exchange during the 1950s, 1960s, and early 1970s. This accord was eventually undermined by contradictory relations inherent in the organization of the accord. The bureaucratic control of the assembly line process engendered a mundane work experience, increasing overhead costs, and conflict. The postwar boom reduced to low levels the reserve army of labor, thereby increasing the distributive power of labor and reducing the incentive for workers to labor as the possibility and cost of job loss declined. This led to a decline in productivity and the rate of profit [Bowles and Edwards 1985, 339-40]. There is scope for a new flexible accumulation process evolving into the next century through "post-Fordist" relationships, but this is in its infancy.
The third institution, the state-citizen accord (the Keynesian-welfare state), was based on rising welfare payments, a higher dole, and greater influence of the state in economic life, especially during the 1950s, 1960s, and early 1970s. Rising state expenditure propelled growth and thereby contributed to the reverse reserve army effect and rising working-class power. By acting on citizen rights to environmental controls, occupational health and safety, and consumer protection legislation, the state upset the profit-needs of business through regulations and taxes [Gordon et al. 1990, 166-7]. Thus, the Keynesian-welfare state had immanent contradictions in the sense that, while expansionary policies promoted growth, the growth eventually became inflationary; and the degree of "welfare," regulation, and protection reduced the incentive to invest and work, thus reducing growth. Despite the Thatcher and Reagan conservative reactions against labor, a new set of state institutions has not yet been constituted.
These three institutional structures cumulatively provided the reproductive foundation for relative stability, profitability, and investment for about two decades during the long boom of the 1950s and 1960s. But, as the contradictions within (and between) the structures cumulatively merged to form a ruptural disunity, instability led to lower expectations of profit, and hence the deep recessions in the 1970s, 1980s, and 1990s during the long wave downswing. In its approach to rectifying some of these anomalies, the SSA approach is similar to institutional economics in calling for reduced waste, discrimination, and more participatory democracy [Bowles, Gordon, et al. 1990, 12-13, 172-3]: an expansion of instrumental functions. However, the SSA approach is in its infancy, and certain anomalies need to be rectified.[4]
Conclusion
The purpose of this paper was to review some theories of the long wave that are likely to be of interest to AFEE members. Special reference was placed on the Schumpeterian theory of innovation; an attempt to link innovation with the regulation approach; and the social structures of accumulation approach. The Schumpeterian approach is somewhat deterministic with its emphasis on innovation, without a broader linkage to the social and political institutions. Tylecote and Perez seem to have provided the basis for a successful linkage of these Schumpeterian concerns with the broader picture of institutions developed within the regulation approach. The dialectic between technological style, social/political institutions, and feedback processes is one that utilizes an institutionalist method. Similarly, the social structures of the accumulation approach to Kondratieff waves is institutionalist in its method and could benefit by incorporating some of the AFEE concerns of institutional adjustment, progressive/regressive change, and evolution. The work of the regulation and SSA approaches are very much in the institutionalist tradition and deserve to be closely examined by AFEE members.
Notes
1. For detail on these principles of institutional or holistic economics, see O'Hara [1993]. The holistic or institutional method, following the work of Gunnar Myrdal [1974, 1978] and members of AFEE, seeks to examine the cultural foundations of the economy. Cumulative causation recognizes that the turning points in economic life are especially important, and that these are produced when an evolution in one of the dominant institutions links with other changes in other institutions in such a way that the first change elicits secondary and tertiary changes generally in the same direction [Lewis 1977, 147]. In institutional methodology, the system is in continual evolution; incessant change and flux are the essence of open systems; and economic activity "is part of an ongoing process, not part of a mechanistic system leading to a state of balance or equilibrium" [Peterson 1977, 204]. Deterministic predictions are not possible because of the complexity of the changes and the human-centered nature of the relationships [Hodgson 1988, 12]. Power, conflict, and disrapport between/within institutions ("contradictions") are as important as cooperation and warranted knowledge. Policy options for renewed growth and development necessarily make value judgments about the desired way to reduce the contradictions while promoting the social wealth, with an accent on reducing the degree of ceremonial encapsulation of the knowledge [Bush 1987].
2. Some authors believe that Schumpeter's theory of cycles and waves is based on "exogenous" forces, but a careful reading of his work shows this not to be the case. Using a method of successive approximation, he introduced innovation into his model to see how it would affect the circular flow. For him, the process of innovation and business cycles is endogenous to capitalism. As he said: "Cycles are not, like tonsils, separate things that might be treated by themselves, but are, like the beat of the heart, the essence of the organism that displays them" [Schumpeter 1939, v].
3. It is thus a synthesis of the best in the Schumpeterian and neo-Marxist traditions.
4. For instance, the number of institutional spheres needs to be expanded to include the dual economy of oligopoly/competitive firms [Gordon, Weisskopf, and Bowles 1990, 167-169]; the domestic financial system [Wolfson 1990]; plus household labor and the family [O'Hara forthcoming, chap. 8]. The concept of "institution" and "institutional adjustment" is not well delineated; AFEE literature could be of considerable help here. Also, Kotz [1987, 1990] has introduced the notion of "core institutions" (rather than a completely new SSA) that must be developed before a long wave upswing can proceed; core institutions must be compatible with the old surviving institutions. Despite these problems, the SSA approach to long waves is compatible with institutionalism because it is holistic, implicitly utilizes the concepts of circular and cumulative causation, examines the evolutionary transformation of capitalism, and places emphasis on the contradictions between capital and labor, nation and world economy, and big and small capitals. It also has an instrumental view of value and participation [Stan-field 1984] that is very similar to institutionalism.
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